Maybe the Giant has Narcolepsy

Tyler Cowen makes an interesting point in passing about the protests in Brazil that I think are worth expanding upon further:

Without wishing to rely too heavily on Tocqueville’s analysis of the French Revolution (pdf), that’s not how things usually work. Very often there is an ongoing history of major problems and depredations. Then things seem to get better or perhaps they really do get better. Expectations start to rise. Then some small events come along and those events are blown out of proportion, leading to the crisis in public opinion that didn’t quite happen in the first place.

The current Turkish crisis was set off by a dispute over a public park, and the recent demonstrations in Brazil seem to have been prompted by a 7% hike in bus fare prices, which is about ten U.S. cents. Yet in neither case is the small trigger the ultimate cause of the discontent.

Many deconversions from religion, or from fandom, or even from marriage, work the same way. Big lies are told and those lies inflict some damage. The institution in question soldiers on. A bit later, an apparently smaller slight or problem brings the whole thing crashing to the ground, precisely when things appeared to be getting better.

I’m not saying it always runs that way, only that it is a very common path. Furthermore the steepest period of decline is very often when people are too preoccupied with coping to make the major adjustment.

In the Brazilian context, I think this is absolutely true. The last decade and a half has been a unique time of consistent improvement for Brazilians. Whereas the 60s and 70s saw brutal military dictatorship, the 80s and early 90s hyperinflation, and then a devaluation in 1999 as a result of contagion from the Asian Financial Crisis, the 2000s have been a time of steady growth and increasing social inclusion. However, in the last couple of years, things have stopped improving as quickly and the million little annoyances that typify daily life in Brazil suddenly become less tolerable. This is unequivocally a good thing; a growing middle class has rewritten Brazil’s social contract such that Brazilians expect their elected officials to make their lives better and not just tolerable.

The question is, how much can the government do (and how much will it be allowed to do) in the next few years to improve people’s lives?

Economically, Brazil’s problems are largely on the structural side and the solutions could be implemented relatively quickly, though many of the benefits would take time to percolate and would cause dislocations in the meantime. For instance, taxes are far too high relative to the quality of services the government provides. Instead of providing useful services, taxation in Brazil is mostly just a transfer of wealth from a relatively efficient private sector toward an extremely inefficient public sector. Lowering taxes could be achieved quickly in theory, but would necessitate cuts to public sector employment that would most affect the middle class Brazilian currently protesting. Moreover, this wouldn’t necessarily be met with a concurrent rise in private employment or improvement in the quality of government services.

Similarly, labor markets are extremely inflexible. Once a person is hired into the formal sector, it is prohibitively costly to employers to then fire them, whatever the reason. The upshot of this is that firms are extremely reluctant to hire and laws designed to protect workers end up forcing many into the informal sector where they have no formal protections and are far less productive. Again, there is a clear theoretical solution to this problem; weakening or eliminating the most onerous requirements on employers such as massive, guaranteed severance. However, increased labor market flexibility does, as a professor said, mean that you’re making it easier to fire people. In certain contexts, being more easily able to fire someone does also make it more likely that they’ll be hired in the first place, but it is rarely a popular sentiment, particularly with the largely middle-class group of people who benefit most from the existing labor laws and are also the most likely to lose their jobs in their absence.

Beyond those issues are problems with crime, corruption and the quality of education, all of which have significant impacts on economic growth, social mobility and quality of life. Whereas some of Brazil’s biggest economic problems persist because politicians lack political will, these problems intractable and lack even clear theoretical solutions. They are also among the most common complaints leveled against the government by the protesters.

To answer my own question from before, I am bearish on Brazil in the near future. Brazil’s economy is much less distorted than its Mercosur counterparts like Argentina and Venezuela, but still has some significant supply-side problems. During the latter part of the Lula presidency, there was some expectation that he might engage in a bit of reforming, but largely did not. Now, with commodity prices coming off their incredible highs, the Brazilian economy is less buoyant than it as and the structural weaknesses in Brazil’s economy are increasingly salient. Unfortunately, in the face of massive protests, it seems unlikely Brazil’s government will be able to address the issues it can improve, and unable to improve the things protesters are most upset about.

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